Unsecured loans are preferred by many, because it does not need any form of collateral like properties or business assets. It is a collateral free loan provided by the lender on the basis of the creditworthiness of the borrower. Examples of unsecured loans include business loans, personal loans, private loans, student loans and credit cards.
Unsecured loans are a contrast to secured loans where a personal property or business asset is pledged as a collateral by the borrower. The collateral pledged acts as a security to the lenders who provide the loan. Unsecured loans are also referred to as personal or signature loans and are approved without the need for any property or assets in the form of collateral. The approval of unsecured loans entirely depends on the credit score of the borrower. The credit score must be very high in order for one to avail an unsecured loan.
Unsecured loans are not easily granted as they pose a great risk to the lenders as there is no collateral for them to take hold on if the borrower does not pay the loan. Defaults can happen when a debtor is unable to pay the debt on time. But when it happens, the lender has nothing of value to claim against. At those times the lender will take civil actions which include hiring a collection agency and filing a lawsuit to recoup unpaid balances but the chances of this happening are low.
Unsecured loans are collateral free unlike secured loans which require personal or business assets to be submitted as collateral
Can be availed by persons with insufficient credit score if they have a cosigner who takes the responsibility to repay the debt if the borrower fails
Personal loans, private finance, personal lines of credit, credit cards and certain business loans are unsecured loans Since unsecured loans do not require collateral, they are mostly offered to persons with high credit score and creditworthiness.
Lenders make the final decision of whether to approve or reject the unsecured loan based on the borrower's creditworthiness, but there are laws to protect borrowers from discriminatory lending practices.
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